When we experience a market selloff as significant as we have since the end of February, it can be a nerve-wracking experience. Even the most seasoned investors can have their emotional fortitude tested. In fact, the extreme volatility we have observed, in conjunction with the occasionally wild price swings, suggests that even professional investors are having difficulty navigating the torrent of news.

Do you sell? Do you buy? Do you do nothing?

We are not going to opine on whether you should make significant portfolio reallocations during these types of market events. Ideally, thoughtful portfolio allocation strategies are typically designed to potentially weather market corrections. No doubt, investors have already received a deluge of marketing updates and capital markets commentaries urging patience and sticking with quality assets. Historically, there’s a lot of merit to this advice.

The intent here is to provide some insight on ETF strategies that could generate potentially attractive total returns coming out of the correction.

Are the Big Six Banks Nearing a Bottom?

The selloff in Canadian bank stocks took a lot of investors by surprise, and it was largely a result of the broad selloff in financial stocks and growing concerns about the health of the Canadian economy. However, in terms of quality cash-flow and diversified sources of revenue, the banks remain well-positioned and currently have high dividend yields by historical standards.

As at March 19, 2020, the weighted average current dividend yield1 on the Solactive Equal Weight Banks Index, which is the underlying index of the Horizons Equal Weight Banks Index ETF (HEWB), was more than 6%. HEWB is the lowest-cost2 option when it comes to buying an ETF with exposure to the six large Canadian banks, all of which are equally weighted in the index. HEWB is down 31.14% on a total return basis for the one month period ending March 19, 2020, offering a rare opportunity to gain exposure to Canadian banks at their lowest price point in nearly four years.

Below are performance and dividend yields of the six banks as of the market close on March 19, 2020.


Source: Bloomberg as at March 19, 2020.
** Since HEWB’s inception on January 22, 2019.
1The most recently announced dividend amount, annualized based on the dividend frequency, then divided by the market price as at the close of March 19, 2020 has been used. Gross or net dividend amount is used based on market convention.

The indicated rates of return are the historical annual compounded total returns, including changes in share value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return above are not indicative of future returns. The ETF is not guaranteed, its values change frequently, and past performance may not be repeated.

For Canadian retail investors, the idea of potentially getting around a 6% current yield on bank stocks (assuming no change in underlying dividend distributions) would likely have a lot of appeal, particularly as interest rates decline. The Canadian banks have been a solid bulwark of Canadian portfolios and could potentially be viewed as a safe-haven income equity asset for income-focused investors.

Best Yield Since 2008?

This chart shows the RBC dividend yield and price performance over the last 20 years. We use RBC here, but could show a similar trend with any of the other Big Six banks. What we have witnessed over the last several weeks is the yield on RBC spiking to its highest level, which has not been observed since the 2008/2009 financial crisis.

History doesn’t necessarily repeat itself, and we would never suggest it would in this case. Investors who entered into RBC when the yield on February 23, 2009, saw an approximate 323% price return and 550% total return over the next decade if they continued to hold until February 21, 2020.


Source: Bloomberg from 3/19/2000 to 3/19/2020.

Some key benefits of HEWB:

● Low-cost2: With a 0.30% management fee, HEWB is the lowest-cost equal-weight Canadian banks ETF in Canada
● The Total Return Index Advantage*: HEWB is part of the Horizons Total Return Index family of corporate class ETFs (“Horizons TRI ETFs”). HEWB uses a total return swap contract to replicate the performance of the Index. This structure typically reduces tracking error associated with replicating an index and increases tax efficiency
● Tax Efficiency: HEWB is not expected to make taxable distributions, making it advantageous for taxable accounts. The reinvestment of index constituent distributions are reflected in HEWB’s Net Asset Value (“NAV”) on their ex-date – which can result in more efficient compounding than ETFs that compound only quarterly or even monthly

2 HEWB has the lowest management fee among a total of 3 “equal weight Canadian banks” ETFs, as at February 21, 2020

Given current market conditions, investors may be able to sell individual shares of Big Six banks at a loss, harvest a capital loss that could be used to offset future capital gains, and diversify their exposure across the Big Six using HEWB.

*Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF does not track an index but rather a compounding rate of interest paid on a cash deposit that can change over time.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our 2x Daily Bull and 2x Daily Bear ETFs (“2x Daily ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the 2x Daily ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The 2x Daily ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a 2x Daily ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the 2x Daily ETFs, possibly direction from the performance of their respective Target(s) for the same period. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager will publish, on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.